The George Washington University School of Business Department of Finance Fakhri Ismayilov, PhD Long-term Fiscal Sustainability in Azerbaijan: Current.

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Presentation on theme: "The George Washington University School of Business Department of Finance Fakhri Ismayilov, PhD Long-term Fiscal Sustainability in Azerbaijan: Current."— Presentation transcript:

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The George Washington University School of Business Department of Finance Fakhri Ismayilov, PhD Long-term Fiscal Sustainability in Azerbaijan: Current issues and Post-crisis Challenges Fulbright Scholar

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 Population: 9 million  Territory: 86 th.sq.km.  GDP of Azerbaijan (PPP based) is around 2/3 of total GDP of South Caucasus region  GDP per capita in 2009 5400 USD

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 Last periods of high economic growth rate achieved by a broad social dynamics and capital budget in the face of rising oil revenues.  Increasing dependence on oil revenues, the budget deficit in the state budget, in particular the non-oil budget deficit is important in terms of macroeconomic stability and sustainability of the budget issue.  The difference from other resource-rich and developing economies emanates from the fact that proven oil and gas reserves of Azerbaijan are short-lived to be depleted by mid-2025, which exacerbates the need to ensure longer-term fiscal sustainability. The Importance of Theme 3

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 Assess the current situation of fiscal deficit on a macroeconomic point of view,  The methodology for the calculation on the basis of international practice in determining the level of non-oil budget deficit;  To ensure the sustainability of the budget for a fixed volume of used oil revenues by the principle of Permanent Income Hypothesis methodology and determination of the limit of the optimal use of oil revenues;  Medium-term fiscal strategy evaluation and implementation opportunities in Azerbaijan;  Fiscal Policy Consolidation - “The New Procedures for the Preparation of the Sate Budget (within MTF)“. 4 The main purpose of the paper

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The structure of budget revenues In recent years, an average of 60% of the budget expenditure is financed through oil revenues. 5 Oil revenueNon-oil revenue Budget revenue,% Oil price and budget expenditure Budget expend.growth,% Oil price

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Evaluation of the optimal level of oil revenues spent in terms of fiscal sustainability Permanent Income Approach in IP*: 1. Total oil wealth from financial assets: W = V + NPV (1) W - the creation of oil wealth is expected to total financial assets (current value); V - the current balance in the oil assets; NPV - the expected total net present value of oil and gas revenues. 2. The expected total net present value of oil and gas revenues: (2) R - estimated oil revenues for each year during the period; i - nominal interest rates in international financial markets; n - number of years. 3. Limit the use of oil revenues within a year: PI = r * W (3) r – the real annual return on assets management of the oil (r = i - p); W – the creation of oil wealth is expected to total financial assets (current value). * - IP – international practice (IMF/FAD) 10 Current expend.PIOil revenue The Goals of Long-term Fiscal Sustainability is: A fiscal trajectory must be constructed, so that in the coming years the current abundance of oil revenues can be covered with a fiscal budget when oil revenues will decline. If the oil revenues are well spent on the optimal level, after 8-9 years oil reserve assets will be around $ 100 billion (in current prices). To define Sustainable fiscal benchmark: Sustainable non-oil primary deficit = r/(1+r) * government wealth = r/(1+r) * (present value of oil revenue + financial assets–debt) Reserve 100 bln.$ NPV SOFAZ